Sunday, May 31, 2009

Derivatives and the Wisdom of Crowds - By L. Gordon Crovitz - The Wall Street Journal - "In the early days of the credit crisis, some in Congress wanted to ban financial derivatives. Others wanted a Financial Product Safety Commission, modeled on the Consumer Product Safety Commission, with a bureaucracy to approve or recall financial instruments. The good news is that last week's administration proposals for how financial markets should operate are focused on better disclosure instead of micromanagement."

On Health Care, Republicans Move Beyond 'Just Say No' - USA Today - "The idea is to introduce market forces into health care to hold down costs that are soaring unsustainably. Here's how it would work: The government would essentially pay for the first $5,700 in coverage for a family through the credit, and the family would pay the rest out of pocket. With the average family plan costing $12,700 now, that is a major cost. An employer could contribute, but with workers having to pay tax on the benefit, the employer might as well convert it to pay."

Saturday, May 30, 2009

Here in Atlanta, we are cycling out of our monsoon season into the heat of summer. Because of my workload during tax season, I usually miss most of the beautiful spring days. After tax season ends, in most years it has already become too hot to want to stay outside for very long. This year, however, the weather has been different.

Things are really changing all over. Cats must be sleeping with dogs and the world must’ve turned upside-down! In Atlanta, it has rained almost continuously since the 1st of April. Lake Lanier’s water tables are back to normal after years of drought, and my rose beds are so wet that a few days of heat would be appreciated. I have no fear, though, that the weather will return to normal. I expect that our typical hot and humid days are just around the corner.

So it is with the economy; normalcy has returned, although it crept in under the radar. Today is the last trading day for the month of May. Can you believe that May is the third straight month where all the major indexes have made a profit? With all of the hand wringing and calls for panic, the major stock market indices have slowly – but profoundly – made a turn for the better.

The chart below reflects how quickly and dramatically the stock market indices have completely turned around. Through the end of May, the Standard & Poor’s Index of 500 Stocks and the NASDAQ Composite are now positive for 2009 and the Dow Jones Industrial Average is only marginally negative.

On Wednesday, the National Association of Business Economists reported that 90% of their economists predicted a recovery in the U.S. economy to take place in 2009. In fact, 74% of the economists predicted that the economy would recover during the 3rd quarter of 2009. May I remind you that I made the same prediction many months prior, without the wealth of information that these learned economists possess? Sixteen percent of the economists said that the recovery would occur during the 4th quarter of 2009 and the remaining 10% said it would occur during the 1st quarter of 2010.

It’s hard to believe that the 3rd quarter begins in just one month. Even though many were predicting only a few months ago that the U.S. economy was on the virtual edge of a financial abyss, now almost all economists are projecting the turnaround to be in the near future.

It’s fascinating that this turnaround is occurring without the massive spending of the stimulus bill. Yes, it’s true that some of the stimulus money has made its way into the economy, but a vast majority of it has yet to be spent. You’ll recall that the mandate was that the money would need to be committed in the first 120 days after the bill’s passage. We just passed the 100th day, and only a small fraction of the stimulus money has made its way into the economy.

As I have often written in these posts, the U.S. economy is a fabulous corrector of its own abuses. The economy tends to correct itself without governmental intervention due to capitalism and entrepreneurship. The more government interferes with the economy, the worse it becomes.

I never believed that the economy was as bad as was being reported by the financial press, but even if it was, it is now on the mend. It’s unfortunate that panic caused us to appropriate literally trillions of dollars that will now be forced into the economy when it’s probably not even needed at this point. The deficits that are being projected for the economy over the next decade are truly mind-boggling in size. During the height of the panic, we felt we needed – and our Congress approved – massive spending undertaking for years to come unlike anything ever seen in the history of this country.

Now the economy is recovering without the aid of massive spending, yet the vast majority of the stimulus bill has not been spent nor will it be spent for several years. In retrospect, our government panicked to the ultimate price of the taxpayers.

I want to briefly review a few of the topics I have covered over the last eventful eight months. One of my posts explained the importance of the 3-month LIBOR interest rate. This is the interest rate that is used for interbank lending. Therefore, the higher the rate, the less likely banks are to lend to each other. In September of 2007, the 3-month LIBOR rate got as high as 5.7%. During the panic of October, 2008, the rate neared 5%, and it basically stayed at this level until it began falling very recently. As of yesterday, the 3-month LIBOR rate had fallen to 0.67%, which is one of the lowest rates on record. The economy has fixed itself and now banks are more than willing to lend to each other.

I previously wrote that the 10-year Treasury rate was yielding a minuscule 2%. Investors were so afraid of taking on risk that they were willing to accept a measly interest rate rather than risking their capital. Yesterday, the 10-year Treasury rate was at 3.5%, which is up 75% from where it was recently. Investors are no longer willing to accept diminutive yields on cash and government bonds when virtually every asset class is producing higher rates of return.

The steeper the yield curve between short-term rates and long-term rates, the more money banks can make. For example, if banks can borrow cheaply but lend at a much higher rate, their effective rate of return is dramatically improved. Today we have the steepest yield curve ever in our history. The 1-month Treasury rate is 0.11% and the 10-year Treasury rate is 3.5%. Never has the upward inclining yield rate been this dramatic. Notwithstanding all of the negative news you hear in the financial media, you do not need to know any more than this to predict that banks will report extraordinary profits this quarter – from banking, not investing.

Remember the infamous TARP plan proposed in September of 2008 that started the panic? Doesn’t that feel like decades ago? It’s hard to believe so much has happened in the intervening eight months. It was announced yesterday that the U.S. Treasury and the FDIC are postponing the implementation of the purchasing of toxic assets. You may recall that this is the exact proposed plan that got the panic rolling. Here we are, eight months later, and there is a likely chance that the TARP will never be implemented. So far, not even one toxic asset has been sterilized.

As I wrote in my post during that time, banks are unwilling to sell assets at the prices people would be willing to pay for them. The banks believed from the beginning that the prices were too low and that there was a high likelihood that price levels would recover. There are few investments for banks to make these days with higher rates of return, so banks want these toxic assets to improve their profitability. In fact, as convoluted as it sounds, the banks proposed to the U.S. Treasury that they would be willing to buy their own toxic assets. Of course, this was a sleight of hand by the major banks to indicate their own confidence level in their assets.

It was believed last summer that the reason the price of oil went to $150 a barrel was because of the extraordinary strength of the world economy. Obviously that was not the case, and as it became clear that many economies were faltering, the price of oil dropped down into the mid $30 per barrel range. Have you noticed that the price of oil has exploded in the last few weeks? Today a barrel of oil is $66. It’s unlikely to assume that the price of oil would double if the worldwide economies were falling further into recession. There are signs in all the commodities that positive economic activity is occurring since they are virtually all accelerating higher.

Investors are beginning to believe that the stock market increases are for real. During April, investors invested $12.3 billion in new money in stock funds. This was only the second month of positive cash inflows over the last year. Even more astounding is that investors withdrew $27 billion from stock funds during the previous month of March to turn around and invest $12.3 billion of new money during April.

Today there is roughly $3.5 trillion invested in stock mutual funds. It is currently estimated that the total commercial cash in deposit accounts exceeds the full value of the stock mutual funds. Only a small portion of this cash, which is earning virtually zero percent, would make the stock market go dramatically higher. As investors become disenfranchised with earning less than ½ of 1% in money market accounts and less than 1% on their CD’s, they will seek the higher rates of return that financial markets offer. When that happens, the stock market will go up even higher.

All of America has lost a great deal of money over the past year from financial assets and real estate. All of our retirement and liquid assets have been depleted. I vividly remember begging my clients to invest in their IRA’s at the lows of the stock market in February and March of 2009. Very few did so. With the market up some 35% in the intervening few months, I’m willing to bet that those who didn’t wish they had.

I consistently see misplaced blaming regarding the reasons for the financial meltdown. Politicians are notorious for incorrectly placing blame. It’s true that there were bankers who did things wrong, and it’s also true that Wall Streeters took advantage of the situation for their own economic benefit. But the true source of this financial meltdown can only be attributed to our government itself. The following quote from Thomas Sowell, a well-known U.S. economist, succinctly characterizes the current financial situation: “Riskier mortgage lending practices, imposed by government, were what set the stage for many mortgage payments to stop, and thus, for the financial disasters that followed.”

In the end, blame should be placed where it properly rests. The Federal government’s intervention with private industry is where the mistake began and ended. They forced banks to lower their lending standards to boost homeownership, and that was the principal mistake. Then they encouraged Fannie Mae and Freddie Mac to finance the whole mess by buying up the bad loans. These governmental agencies were essentially threatened with extinction if they did not comply with the government’s ill-advised mandates.

The end result is that the government forced private industry to do what it did not want to do and the financial results are self-evident today. Now, by the government’s own estimate, we are going to have to borrow $9 trillion in new debt to recreate the American economy in the eyes of the current government. With the government’s own extraordinary track record of ineptitude, you should not be anything but discouraged for the future.

As the last eight months have shown, private industry and the U.S. economy are more than able to recover on their own. My hope is that as the economy continues improving over the next 12 months, we will abandon all of these ridiculous unneeded governmental spending programs and get back to a U.S. economy controlled by business people and not politicians who have no experience in working in the private sector.

Everything mentioned above is just my thoughts and opinions. As always, I could be wrong.

Friday, May 29, 2009

GDP Revised to Smaller Decline in Q1 - The GDP for the 1st quarter of 2009 was revised to a smaller contraction by the Commerce Department on Friday. The revised estimate was for -5.7% (annualized) GDP versus the initial estimate of -6.1% GDP. The revisions, which came from more complete information not available then (1 month ago), saw higher inventory building and greater exports, offset by weaker consumer spending, compared with the first estimate.

Most economists are predicting a -2% GDP in Q2 2009 and a positive GDP in Q3 2009. There have been a wide range of estimates for Q3 with +1.4% GDP being the most prevalent.

Consumer Sentiment Rises in May - The consumer sentiment index rose to 68.7 from 65.1 in April. The estimate in mid-May was 67.9. The index is at its highest level since September with more Americans believing the end of the recession is approaching according to a survey released Friday by the University of Michigan and Reuters.

GM News - There is quite literally more news to post on GM than one would believe since the bankruptcy deadline is fast approaching. There are developing stores on the following: 35% of bondholders tendered debt; bondholders may recoup $14 billion out of $27 billion; reportedly reached a deal to sell Opel to Magna; shares trade below $1 for the first time in 76 years; to build compact cars in US; UAW likely to approve deal; etc.

Obama Creates "Cyber Czar" - Calling cyber-security one of his "key management priorities," President Barack Obama on Friday announced the creation of a White House cyber-security chief position. Obama didn't name anyone to the post on Friday but said a focus on threats to U.S. computer networks is overdue. "Cyberspace is real, and so are the risks that come with it," Obama said at the White House. "We're not as prepared as we should be."

Thursday, May 28, 2009

New GM Swap Deal Gets Major Bondholder Backing - "The Ad Hoc Committee of GM bondholders supports the revised offer from GM and believes that when contrasted with the alternative -- uncertain and costly bankruptcy court litigation -- that it represents the best alternative for bondholders in the current difficult and dire situation," the committee said in a statement. The committee (as well as most individual bondholders) continues to be troubled by the preferential treatment of the UAW over bondholders of secured debt, but in light of litigation and ongoing uncertainty, this proposal seems better than before.

"Given these factors, the allocation of 10 percent of common equity in the new GM, plus the opportunity to participate in the upside of the company through warrants to purchase 15 percent of the fully diluted equity in the new GM, gives the bondholders the opportunity to recover a greater portion of their original investment than was previously offered," the statement said. *** Note - the original offer was for 10% equity only.

Oil Moves Higher on Economic Data and Inventories - Crude-oil rose early Thursday after a pair of government reports showed the number of new layoffs declined last week and durable-goods orders rose more than predicted last month. It then extended gains after government data showed a surprise drop in last week's crude inventories. Crude inventories dropped 5.4 million barrels in the week ended May 22, declining for a third straight week, the EIA reported. Analysts surveyed by Platts had expected an increase of 1.8 million barrels. After the data, crude for July delivery rose $1 to $64.45 a barrel. It was up less than 1% before the inventory data. Gasoline inventories fell by 600,000 barrels last week and distillate stockpiles, which include heating oil and diesel, rose 300,000 barrels, the EIA said.

Home Builders Down on Housing and Foreclosure Data - Home builders were lower after a government report showed new-home sales rose less than expected in April. Additionally, a record percentage of U.S. mortgage loans entered foreclosure in the first quarter, according to a survey from the Mortgage Bankers Association.

Articles

A Single Bold Line in Banking - By David Weidner - MarketWatch - "Top administration officials are close to recommending a single regulator for the banking system. The move would combine functions of the Federal Deposit Insurance Corp., Federal Reserve, Office of Thrift Supervision and Office of the Comptroller of the Currency, according to a report in The Wall Street Journal."

The Bond Vigilantes - The Wall Street Journal - "They're back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession."

Wednesday, May 27, 2009

Bank of America Has Raised $26 Billion - Bank of America said Wednesday that it has raised about $26 billion of the roughly $34 billion in new capital that the government said it needed to raise after recently finished stress tests. In addition to a previously announced $13.5 billion common stock sale, and about $7.3 billion raised from the sale of China Construction Bank shares, the company said Wednesday it has also added $5.9 billion to its capital via a preferred stock conversion. It said it has entered into agreements with certain holders of (non-government) perpetual preferred shares to exchange their holdings of about $5.9 billion of preferred stock into roughly 436 million common shares. Bank of America reiterated that it might also sell assets like First Republic Bank and Columbia Management Group to raise more capital.

Discount Retailer Dollar Tree Profits Jump - Dollar Tree said Wednesday that its first-quarter profit increased 39% as stores open at least a year posted a 9.2% increase in sales. Dollar Tree said it earned $60.4 million, or 66 cents a share, compared with a profit of $43.6 million, or 48 cents a share, in the first quarter of 2008. Net sales rose to $1.20 billion from $1.05 billion. On average, analysts polled by Thomson Reuters were expecting a profit of 60 cents a share on sales of $1.19 billion. In the second quarter, Dollar Tree expects to earn 47 cents to 51 cents a share on revenue in the range of $1.17 billion to $1.20 billion, as same-store sales grow by a "low-to mid-single digit" percentage.

GM - Bondholder Offer Rejected, Bankruptcy Likely - With the overwhelming rejection of the proposed equity for debt swap for current GM bondholders, the company looked to be heading towards bankruptcy. Even with a late concession by the United Auto Workers (UAW) union that it would take a 20% stake in GM (down from the original plan of 39%), the deal seems done. The new concession by the UAW would have essentially freed 19% of the equity stake to be put towards current bondholders - bringing their stake to 29%. Since the deal did not go through, the equity freed by the UAW deal now apparently will go to the U.S. which may have to commit billions more for GM's restructuring in court.

As it stands now, the government's ownership could go as high as 69% from what was originally 50%. The Canadian government also could get equity for up to $8 billion in aid for the automaker.

Over 90% of Economists See US Recession Ending in 2009 - According to a report from the Associated press, more the 90% of leading forecasters in a survey by the National Association for Business Economics say the recession will end in 2009. It is generally in line with the outlook from Federal Reserve Chairman Ben Bernanke and his colleagues. According to the AP, about 74% of the forecasters expect the recession to end in the third quarter, 19% predict the turning point will come in the final three months of this year, and the remaining 7% believe the recession will end in the first quarter of 2010.

"While the overall tone remains soft, there are emerging signs that the economy is stabilizing," said NABE president Chris Varvares, head of Macroeconomic Advisers. "The economic recovery is likely to be considerably more moderate than those typically experienced following steep declines."

Tuesday, May 26, 2009

Consumer Confidence Index Jumps Dramatically Higher - The consumer confidence index rose to 54.9 for May vs. a revised 40.8 for April as expectations for jobs improved. The gain is the fourth-largest in the 32-year history of the survey, and the index is at its highest level in eight months. Analysts had predicted a rise to around 43 but certainly not almost 55. "Expectations are that business conditions, the labor market and incomes will improve in the coming months," said Lynn Franco, director of the Conference Board's Consumer Research Center. "While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us." The market jumped significantly higher on the news with the Dow rising 120 points.

Crude Oil Drops - Crude oil fell back below $60 a barrel Tuesday morning on expectations that OPEC will not cut production quotas at a Thursday meeting and as the U.S. dollar rose against the euro (oil is sold in US dollars thus as it strengthens the commodity will generally fall in price). Instead of cutting production quotas, OPEC will most likely try to ask member countries to adhere to the previous quotas (only 80% participation) since some are over producing currently. The dollar was strengthened by a flight-to-quality following North Korea's nuclear test Monday.

European Investors Grab Corporate Debt - WSJ - While struggling banks are unwilling to lend, European investors are piling into corporate debt and risky bonds at a surprising rate, The Wall Street Journal reported on Tuesday. So far this year, European investors have invested $268 billion in corporate bonds, the highest level since at least 1995, The Journal said. The appetite for bonds is stretching all the way to some of the riskiest types of bonds, driving hopes that the money could restart even the stagnant market for initial public offerings of stocks, key to any economic recovery. "We're all surprised by how quickly the market recovered," said Emmanuel Gueroult, head of European equity capital markets at Morgan Stanley in London, according to the Journal.

Stocks Modestly Higher, Gold Lower - U.S. stocks turned higher shortly after the open Tuesday, with strength in technology shares (led by an Apple upgrade) offsetting early concerns about North Korea's nuclear tests and the fate of GM (GM was off around 20% at the open). Gold moved lower on a strengthening dollar and the news out of North Korea as well.

Articles

We Are Raising Your Rate - By Peter Jeffrey - The Wall Street Journal - A humorous little take on credit card companies - "Here Come the Candid Credit Card Companies" - "We are telling you about how it is going from a worrisome 12% to a smokin’ 28%, compounded half-hourly, with your house, your car and the pewter tea service that has been in your family since the Norman Conquest, which your mother would polish with her own mother as a little girl, dreamily gazing at her reflection, as collateral."

Monday, May 25, 2009

Three years after the Civil War ended, on May 5, 1868, the head of an organization of Union veterans — the Grand Army of the Republic (GAR) — established Decoration Day as a time for the nation to decorate the graves of the war dead with flowers. Maj. Gen. John A. Logan declared it should be May 30. It is believed the date was chosen because flowers would be in bloom all over the country. The first large observance was held that year at Arlington National Cemetery, across the Potomac River from Washington, D.C.

The ceremonies centered around the mourning-draped veranda of the Arlington mansion, once the home of Gen. Robert E. Lee. Various Washington officials, including Gen. and Mrs. Ulysses S. Grant, presided over the ceremonies. After speeches, children from the Soldiers’ and Sailors’ Orphan Home and members of the GAR made their way through the cemetery, strewing flowers on both Union and Confederate graves, reciting prayers and singing hymns.

National Moment of Remembrance

Seeing that Memorial Day was losing its importance in the minds of younger generations, the concept of the National Moment of Remembrance was hatched by a national humanitarian organizations known as the 'No Greater Love, based in Washington, D.C. It was introduced in 1997 and is recognized by the President and Members of Congress. Since then, 'Taps' is played at 3 p.m. throughout America to honor the contributions of our dead soldiers. All Americans are encouraged to pay respect to them by keeping silent for one minute in their memory at 3:00 p.m.

Sunday, May 24, 2009

A few good articles here. The first deals with credit cards, and there is a painfully simple solution it proposes. The second discusses the economies of the emerging markets... a place that has risen dramatically thus far this year. Finally, the President of The Federal Reserve Bank of Dallas discusses the moves of The Fed, government, and foreign governments.

Healthy Credit - By David Gibson, Carla Hall, and Sylvia Harris - The New York Times - "Last week, President Obama signed legislation that limits the credit card industry’s ability to raise rates, penalize late payers and issue credit cards to people under 21. As consumers, we are thrilled. But as professional communicators, we believe that Congress and the White House have overlooked a simple innovation that could be as powerful as these reforms, if not more so. Inspired by the Nutrition Facts label found on food packaging, we designed its equivalent for credit cards..."

Emerging economies: Decoupling 2.0 - The Economist - "The biggest emerging economies will recover faster than America - Remember the debate about decoupling? A year ago, many commentators—including this newspaper—argued that emerging economies had become more resilient to an American recession, thanks to their strong domestic markets and prudent macroeconomic policies. Naysayers claimed America’s weakness would fell the emerging world."

Don't Monetize the Debt: An Interview with Richard Fisher - By Mary Anastasia O'Grady - The Wall Street Journal - "From his perch high atop the palatial Dallas Federal Reserve Bank, overlooking what he calls 'the most modern, efficient city in America,' Richard Fisher says he is always on the lookout for rising prices. But that's not what's worrying the bank's president right now. His bigger concern these days would seem to be what he calls 'the perception of risk' that has been created by the Fed's purchases of Treasury bonds, mortgage-backed securities and Fannie Mae paper."

Saturday, May 23, 2009

How Boeing Fights Climate Change - by Scott Carson - The Wall Street Journal - "Addressing climate change is a particularly difficult challenge for commercial aviation. While technologies like batteries work for cars, they don't work for airplanes that require powerful propulsion systems. The good news is that there are things we can do to significantly reduce the carbon footprint of commercial planes -- and we're well on our way."

Climate Change and Congress: Weak Medicine - The Economist - "For those who believe that climate change is a serious problem, the decisions that America makes now are of momentous importance. In Copenhagen in December, the world will decide whether to reinvigorate or abandon its effort to avert serious climate change, and what America does between now and then will in large part determine the outcome. So the fact that Barack Obama clearly intends to turn America from being a laggard into a leader in this task is therefore encouraging."

Friday, May 22, 2009

Just a quick reminder that Monday is Memorial Day, and Rollins & Associates and Rollins Financial will be closed (as will banks, the stock market, etc.). Have a great LONG weekend!

Notes

TARP Funds to Be Considered Tier 1 Capital - The Federal Reserve on Friday adopted a rule that will allow banks receiving capital from the bank bailout fund to consider some of the financial injections they have received to be a high-level of capital. According to the Federal Reserve, banks can consider senior perpetual preferred stock they have received from the Treasury Department as grade-A, Tier 1 capital, the kind of assets a bank needs to have lots of. Private preferred equity stakes are often considered Tier 2, a lower form of capital, while common equity has traditionally been considered Tier 1 capital. However, the Treasury is considering the preferred stake investments it has been making in banks to be considered Tier 1. As the financial crisis has worsened, some banks in the program have found that their common equity value has diminished, making the government preferred investment a larger percentage of their Tier 1 Capital. Banks typically need to have a large percentage of their risk-weighted assets as Tier 1.

Dollar Slides Against the Euro - The dollar fell to the lowest level versus the euro since December on Friday. It seems that most traders are looking for some alternatives to the US dollar with diminishing fears about the global economy (the US dollar is considered to be a "safe harbor" during times of economic crisis). The euro topped $1.4026 on Friday, before trading at $1.4007, still up from $1.3904 in trading Thursday.

GM Down on Bankruptcy Fears - Shares of General Motors fell as much as 9% Friday as traders backed out of the stock on fresh reports the automaker was unlikely to keep itself out of bankruptcy. GM was up on Thursday on news the federal government would pump another $7.5 billion of emergency loans into GMAC and reports that at least three bidders have emerged for GM's Opel unit in Europe.

Thursday, May 21, 2009

April Leading Economic Indicators Rise - The recession will be less intense in the near term, and there could even be small growth in the second half of the year, the Conference Board said Thursday. The index of leading economic indicators rose 1% in April (the first increase in seven months) following a revised dip of 0.2% in March. "The question is how long before declines in activity give way to small increases. If the indicators continue on the current track, that point might be reached in the second half of the year," said Ken Goldstein, economist at the Conference Board. Of the 10 indicators that comprise the index, seven rose in April, with the largest positive contribution from stock prices. The largest negative contribution came from the real money supply.

Fed Buys More Treasurys; Treasury to Sell More - The Federal Reserve bought $7.398 billion in Treasurys maturing between 2013 and 2016 on Thursday, the latest in the central bank's program to keep borrowing costs lower and spur economic activity. Dealers offered $45.694 billion to be purchased. The Fed has two more operations scheduled next week.

The Treasury Department said Thursday it plans to sell $101 billion in debt next week in its monthly round of shorter-term note offerings. The government will sell $40 billion in 2-year notes on Tuesday. It will also offer $35 billion in 5-year notes on Wednesday and $28 billion in 7-year notes on Thursday.

OpenTable IPO Is Gobbled Up - OpenTable Inc. saw its shares jump more than 35% in its first minutes of trading Thursday following an IPO that priced above the company's expectations. Late Wednesday, OpenTable priced its initial public offering at $20 a share above its planned IPO range of $16 to $18 a share. The company was selling 3 million shares to generate $60 million in capital.

About Those 'Speculators' . . . - The Wall Street Journal - "Indiana Treasurer Richard Mourdock revealed this week that his state's police and teacher pension funds have lost millions of dollars in the Chrysler 'restructuring.' Indiana's State Police Fund and Major Moves Construction Fund, which finances roads and bridges, together lost more than $1 million. And the Teacher's Retirement Fund 'suffered, at a minimum, a loss of $4.6 million due to the action of the Federal government,' reports Mr. Mourdock."

Poor, Poor Parliament - The New York Times - "Yet the latest scandal to rock Westminster is about Parliament members — and their expense accounts... The speaker of the House of Commons has now agreed to step down, although he won’t face decapitation like some of his predecessors from the mid-16th century."

Wednesday, May 20, 2009

Geithner - Financial Markets Healing - Treasury Secretary Timothy Geithner said Wednesday that the U.S. financial system is beginning to heal. "Leverage has declined, the most vulnerable parts of the non-bank financial system no longer pose the same risk, and banks are funding themselves more conservatively," Geithner said in testimony prepared for the Senate Banking Committee. Many market metrics, including corporate bond spreads, are at their lowest level in months, he said. Geithner said the administration has $124 billion on hand to provide to banks if needed. The department's long-awaited public-private plan to help get toxic assets off bank balance sheets will start in the next six weeks.

Crude Oil Rises on Data - Crude-oil futures rose Wednesday after government data showed U.S. crude inventories fell more than expected last week. Crude inventories decreased by 2.1 million barrels in the week ended May 15, the EIA reported. Analysts surveyed by Platts had expected a gain of 1.5 million barrels. Meanwhile, gasoline inventories fell by 4.3 million barrels and distillate stockpiles rose by 600,000 barrels. After the data, crude for rose $1.38, or 2.3%, to $61.48 a barrel.

Geithner - Cannot Force Counterparties to Accept Losses - The government cannot force AIG's counterparties to share losses on complex securities written by AIG, Treasury Secretary Timothy Geithner said Wednesday. It would be "incredibly difficult for us to negotiate effectively to reduce the value of those claims," Geithner told the Senate Banking Committee. "We have no option now to selectively diminish the value of those claims without taking risk that you would have default and its consequences" for AIG, Geithner said. The financial system still cannot withstand the failure of AIG, he said. Geithner's answer did not mollify Democrats or Republicans on the panel, who are outraged over reports that major financial institutions, including Goldman Sachs, did not take any losses on their AIG derivative contracts.

Bank of America Completes Share Offering - Bank of America shares rose Wednesday as the market responded positively to the conclusion of an almost $13.5 billion stock offering. The company said Tuesday that that since May 8, it has issued 1.25 billion shares at an average price of $10.77 which has netted it gross proceeds of roughly $13.47 billion. Additionally, including the sale of CCB last week, the bank says it is half-way towards its target of $34 billion in raised capital. It must complete the capital raising by November 9 - still more than 5 months away (and two earnings reports).

Articles

Safer Credit Cards - The New York Times - Why will Congress load up a bill that should do just one thing to help the U.S. consumer? "Unfortunately, the powerful pro-gun forces in the Senate managed to contaminate the bill with an amendment to allow licensed owners to carry loaded firearms into national parks."

Tuesday, May 19, 2009

Housing Starts Hit Record Low - New construction of single-family homes and apartments fell 12.8% to a record-low annual rate of 458,000. This is the weakest level since the government began publishing the series in 1959. Starts are now 79.9% below their peak in January 2006. The drop was caused by a slump in construction of multifamily housing, which fell 46.1% to a record low 78,000. This was the biggest drop since January 1994. Starts of single-family homes rose 2.8% to a seasonally adjusted annual rate of 368,000. Single-family starts have shown some stability in the past four months, averaging 360,000 starts per month. Building permits for single-family homes also rose 3.6% to 373,000. *** NOTE - Many economists and experts have said this is part of the bottoming of the market. Working off the inventory that still exists will ultimately lead to a demand for housing.

Crude Oil Slowly Moves Higher - The housing data (above) put a damper on oil this morning as the demand for oil is predicted to still be somewhat sluggish. Oil inventories were expected to have fallen though, so this made the move higher possible. Trading that focuses on the fundamentals (supply-demand, economic environment, etc.) is a welcomed change and shows normality coming back to the market. Trades over the past few months have been fed by emotion.

TJX Companies Beat Estimates - The TJX Companies (TJ Maxx, Marshalls, etc.) said Tuesday that first-quarter earnings were $209 million, or 49 cents a share, compared to $194 million, or 43 cents a share, in the same period a year ago. Sales rose to $4.4 billion from $4.3 billion. Same-store sales rose 2%. Analysts polled by FactSet Research estimated, on average, earnings per share of 45 cents and sales of $4.3 billion. The retail company sees second-quarter earnings of 43 cents to 49 cents.

Articles

Obama's Auto Plan Is Capitalism at Work - By Scott Sperling - The Wall Street Journal - An interesting take on the restructuring of Chrysler. "Contrary to what many pundits claim, the Obama administration's approach to the auto industry is not anticapitalist. Without a drastic restructuring neither Chrysler nor GM would have a chance for long-term success. Not only would thousands of workers lose their jobs, but the government would lose tens of billions of taxpayers' dollars. So rather than simply writing a check to the auto industry -- the policy of the previous administration -- the Obama team is focused on fundamentally restructuring these two businesses."

In Praise of Dullness - By David Brooks - The New York Times - "In other words, warm, flexible, team-oriented and empathetic people are less likely to thrive as C.E.O.’s. Organized, dogged, anal-retentive and slightly boring people are more likely to thrive."

Monday, May 18, 2009

Oil, Gasoline Up, Gold Down - With some political unrest in Nigeria and global markets pointing higher, oil moved higher in Monday's trading. Oil is now trading around $58 and is up 3% from Friday's close. The continued recovery in the global markets is the backbone of the resurgence in oil, but it has started to slow somewhat and trade a bit more on fundamentals. Hopefully, this is a trend that will continue.

With oil moving up, it is no surprise that gasoline has also moved higher. Average U.S. retail gasoline prices climbed by eight cents to $2.31 a gallon in the past week, according to the AAA Daily Fuel Gauge Report. A week ago, gasoline sold for $2.23 a gallon. A month ago, it sold for $2.06 a gallon. A year ago, gasoline sold for $3.79 a gallon.

Along with a stabilization of the economy both domestic and abroad, the safe haven of gold becomes less appealing. This morning gold fell below $920 as global stock markets pushed higher.

State Street Plans Stock Offering - State Street on Monday said it expects to raise proceeds of about $1.5 billion and issue senior notes as it set plans to exit the TARP. The company plans to notify the U.S. Treasury of its intention to repurchase the Treasury's preferred stock and common stock purchase warrant investment in the company.

Bank of America Leads Financials - A bullish research note from Goldman Sachs urging clients to buy Bank of America shares with conviction boosted the stock almost 10% and helped propel the rest of the financial sector. Goldman on Monday upgraded Bank of America shares to buy from neutral and added the company to its conviction buy list, saying the market is absorbing a new stock issue and that the firm could earn 25 cents a share during the second quarter, well above consensus estimates of a penny a share.

Sunday, May 17, 2009

Paying With Our Sins - By Nick Gillespie - The New York Times - "Here’s a better idea — and one that will help the federal and state governments fill their coffers: Legalize drugs and then tax sales of them. And while we’re at it, welcome all forms of gambling (rather than just the few currently and arbitrarily allowed) and let prostitution go legit too. All of these vices, involving billions of dollars and consenting adults, already take place. They just take place beyond the taxman’s reach."

Earmark Nation - By Daniel Henninger - The Wall Street Journal - "Mr. Obama had campaigned against earmarks, even saying he would cut them back to levels before 1994, the start of the Gingrich-GOP interregnum. Now here was Obama as president signing a bill soaked in earmarks. In the course of explaining his way through this contradiction, Mr. Obama dropped a hard truth of modern American politics: 'Individual members of Congress understand their districts best, and they should have the ability to respond to the needs of their communities.'"

Pandemics and Poor Information - By L. Gordon Crovitz - The Wall Street Journal - "In cities across China, authorities rounded up all the Mexican nationals they could find, put them in isolation, and then shipped them by plane back to Mexico. In Hong Kong, as the Journal reported, foreign guests inside a quarantined hotel lobby held a sign: 'We will exchange information for beer and food and cigarettes.'"

Bear Necessity - Investor's Business Daily - "'George W. Bush was right' is something you won't catch Barack Obama saying in public, but his administration is making the point, though quietly, through its actions."

Saturday, May 16, 2009

Since tax season has ended, I’ve actually gotten to play golf a few times, which means I can take out my frustrations regarding tax season and the stock market on the turf. I’ve yet to decide if playing golf is a good release for frustration or not, but I quit taking golf seriously a long time ago because I know that otherwise, it’ll drive you crazy! However, there are still days when the stress level on the golf course is just as great as in the business world.

In high school, I was had the good fortune of being a gifted athlete. Unfortunately, the toll of growing older has diminished my athletic abilities, but in my younger years I could pick up virtually any sport and play it well. Even though I had no formal golf lessons (and frankly, was never very interested in it), I was able to play a decent game the first day I stepped on a golf course.

My father was an older fellow when I started playing golf, but he was always able to beat me over a full round. I could easily drive a golf ball twice as far as he could, but he would always beat me with his finesse game. Playing with my brothers and the other kids in the neighborhood, it was not uncommon for us to throw clubs and use unsavory words to describe a terrible golf shot (which happened often).

I only played golf with my father on rare occasion since he worked almost daily at the local church and finding time to play golf was somewhat difficult for him, especially on Saturdays when he would prepare for Sunday services. I do remember, however, one specific day we played together that changed the rest of my golfing life. On this particular day, while standing in front of the golf cart we were using I hit a particularly bad three wood that hardly went 20 yards. I threw the club down the middle of the fairway – much further than the golf shot – and used many loud obscenities to express my anger.

No sooner had I thrown the club and let out those offensive words did I remember that my father was sitting directly behind me – a man who never uttered a swear word in his entire life. Recognizing that I was clearly in trouble, I tried to figure out a creative way to not have to turn around and face the wrath of my father. Sure enough, his understated response taught me more than any capital punishment that could’ve been inflicted on me. Turning to face the golf cart, my father said, “It didn’t help at all, did it?” He was right; it didn’t help at all – the shot was still bad. From that day forward I’ve never thrown another club (although I have cursed a golf ball on occasion).

In the last year, I have often cursed the financial media; this has been one of those weeks. As I write this post, the stock market is trading down significantly for the week. In fact, the losses have been so great over the last few days that the spectacular gains we had in the early weeks of May have been wiped out. Given the title of this post, you might be surprised about the market’s poor performance this week. However, there are enormous positive undercurrents in the stock market recently, which I seriously doubt have been expressed in the financial media.

Last Thursday, the Treasury Department announced the infamous stress test that they had been working on for some months with the 19 largest U.S. banks. There was, of course, great anticipation and trepidation as to what the stress tests would reveal. I’m not sure that anyone understands exactly what was going on, but I can assure you that the media clearly misunderstood the process. I’ve tried to get a clear understanding of what the Treasury was trying to accomplish, but I’ve failed in that attempt.

It is interesting to note that 10 of the 19 largest banks required no additional capital at all after the stress test was performed. Given the criteria of the stress test, I am absolutely “blown away” that all banks wouldn’t have required additional capital under this extraordinarily extreme scenario.

First, it’s important to remember that stress tests are not uncommon in the banking industry. In fact, they are completed almost monthly by every large bank in America. In order to test the banks’ reserves for potential bad debts, each of the major banks do stress testing of their entire loan portfolio. In fact, stress tests are regularly audited by outside accountants, and there’s a good deal of scrutiny that is attributed to the expected loss reserves on the bank’s loan portfolio.

In this particular stress test by the government, there was an assumed loss rate that was even greater than the loss rates that were incurred by the major banks during the Great Depression. That struck me as somewhat unusual given that the Federal Reserve was forecasting a GDP rate for 2009 of zero, and a positive GDP growth rate for 2010 and 2011. Did they not believe their own numbers? However, for the purpose of this stress test, they assumed a loss rate greater than in 1933 and 1934 when the GDP contracted in double-digit range and unemployment in America was close to 25%. Whatever criteria were used, I think the banks came out with a good report card, for the most part.

The stress test is not the reason for this post’s title. Rather, it’s because of the incredible financial events that have occurred over the last week since the stress test was completed. Almost immediately after announcing the stress test, the banks lined up to issue stock and raise capital from the general public. Wells Fargo & Company set out to issue $6 billion in new stock, but since it was oversubscribed by a factor of two to one they eventually issued close to $8 billion in stock.

Morgan Stanley set out to sell $2 billion of stock and due to the high demand, sold $4 billion in only a matter of hours. Given how easy it looked to raise this additional capital, Morgan Stanley issued another $2.5 billion in debt just a few days later. U.S. Bancorp issued $1 billion in debt and $2.5 billion in common stock on Monday. The Bank of New York Mellon issued $1.2 billion in new stock, and BB&T issued another $1.5 billion. The speed (and ease) of the issuing of stock to cover these capital shortfalls have been nothing short of breathtaking. Have you read this anywhere in the media?

Sales of common stock since the January 1, 2009 have been unprecedented. So far, there has been $54.9 billion in new stock issued in a little over four months, which has been the busiest stock issuing pace since 2000. In the first few days of May alone, U.S. companies sold a total of $28.9 billion of shares and convertible bonds as compared to $6.5 billion in the entire month of March alone. In addition, there have been $13 billion of high yield (or “junk”) bonds sold since the end of April. Even this amount pales in comparison to the issuance of investment grade bonds that have had the best record levels since Dealogic began keeping track in 1995. Even the last independent, non-government owned automobile manufacturer in the United States was able to issue common stock. Ford Motor Company sold $1.4 billion in brand new common stock to the general public this past Tuesday.

To show the non-discriminatory nature of this floodgate of new money, Microsoft, who has never borrowed money in its history, sold $3.5 billion in new bonds. Given that Microsoft already has a war chest in excess of $25 billion in cash and no debt, it seems strange that they would need to raise an additional $3.5 billion. The incredible nature of this issuance of stock and debt was that in many cases, the debt had coupon interest rates that were only marginally higher than the highest quality of government-guaranteed bonds.

Am I confused? Are these not the very same banks that the financial media have in recent months been proclaiming to be insolvent? How could it be possible that so many of the banks proclaimed to be technically insolvent by the financial media are easily raising common stock from the general public and debt that bordered on investment-grade interest rates?

I couldn’t help but note that Nouriel Roubini (a.k.a. “Dr. Doom,” and a professor of economics at New York University), who’s been on almost every financial news program lately, keeps stating that every bank in the United States is insolvent at the current time. Further, Paul Krugman of The New York Times (who is also an economics professor at Princeton University and who won the Nobel Memorial Prize in Economics in 2008) has written a number of editorials recently proclaiming that the only viable situation for the banking situation in the United States is for complete and total nationalization of the U.S. banks. He has been overly critical of the Obama Administration for being too easy on the banking industry and says that only when the government controls every bank will Americans be assured of stability. I guess the millions of people around the world who are buying the stocks of these banks must not agree with these learned economists.

With all the good news regarding the equity flowing into the banks, one might question why the stock market has performed so poorly since the announcement of the mostly positive stress tests. There are some basic technical reasons for the market’s poor performance: In order for a company to be able to sell stock in the secondary market, the stock has to be sold as a discount to the market price. For example, if the an investor purchases stock for $100 a share on the open market, what incentive would he have to buy a new issue when it can be bought at the same price in the marketplace?

In order to encourage new investments, the companies that want to issue secondary stocks do so at a discount. As the new stock is issued at a lower price, the publicly traded stock will adjust down to reflect the issuance price. There has been such a massive underwriting of stocks in the last week that many of the major stocks making up the indices have been adjusted down to reflect these new discounted prices. Since these stocks are part of the major indexes, the indexes must fall.

Additionally, active traders do not help this situation. Recognizing companies will have to issue new stock, the traders will sell short the underlying security even before the secondary offer has even been priced. The idea is that they will force down the issue price and the stock will jump back to its original price once the secondary offering has been filled. Essentially we have only had three trading days during the week, yet close to $35 billion in new stock have been issued in only these three trading days. This enormous amount of new stock has used up a lot of available cash flow that might have been utilized to force stock prices even higher.

The reason that this is “the most important stock market week of the year” should be clear to everyone. Only a few short months ago, the financial media was proclaiming the banking industry in America insolvent and unable to move forward. This week, investors voted with their hard-earned dollars that this was not the case. Even though the Federal government proclaimed the U.S. banking industry to be $75 billion short on capital as of last Thursday, almost half of that has been made up in new stock offerings in less than a week. I have yet to hear the financial media proclaim that over half of the risk capital has been raised in less than a week, even with the stress test that bordered on the ridiculous. Capitalism is a beautiful thing to watch when greed is filtered out. Why are we trying so hard to eliminate capitalism in the U.S.?

I’m not trying to say that the financial crisis has come to an end. But I do believe that these factors indicate that positive healing is occurring. Good companies are now able to issue stock and banks are able to raise capital. As I have repeatedly said since the beginning of this financial crisis, no major U.S. banks will be nationalized, nor will they need to be. What started the financial fear were the banks; at least now we have fewer and fewer banks to fear. Even though there are many economists who believe in the socialized banking example in Sweden, it will not be necessary in America. We may socialize the automobile and health care industries, but not banks (not this year, anyway).

Friday, May 15, 2009

SunTrust to Sell Shares, Cuts Dividend - SunTrust said on Friday morning that it is selling up to $1.25 billion of common stock and cutting its quarterly dividend by 90% ($0.01 per quarter), in order to comply with new federal capital guidelines for banks. "While it was determined that SunTrust is currently well-capitalized, and projected to remain so under the Treasury's more adverse-than-expected economic scenario, in order to meet newly adopted regulatory requirements, the company plans to adjust the composition of its overall Tier 1 capital resources to increase the common equity portion by $2.2 billion," the bank said in a press release. The company said it might sell securities or other assets, as well as exchange preferred shares for common stock, to raise additional capital.

CPI Data - Annual Retail Prices Drop Most in 54 years - Led by a large decline in energy prices, the consumer price index (CPI) was unchanged in April after seasonal adjustments and has fallen 0.7% in the past 12 months - the largest decline in 54 years. The decline in the consumer price index has sparked concerns about deflation in the United States. However, core inflation - which excludes volatile food and energy prices - has not declined. In the past year, the core CPI is up 1.9%. In April, the seasonally adjusted core CPI rose 0.3%, boosted by a 9.3% increase in tobacco prices. Excluding tobacco, the CPI fell 0.1% and the core CPI rose 0.1%.

After No Activity for Months - TARP Being Used Again - In an article in The Wall Street Journal, it was reported that the infusion of $22 billion in to insurance companies was the first new round of funds allocated from the TARP since the country's biggest banks received money at the turn of the year. It was reported that the government plans to make up to $22 billion of bailout funds available to some life insurers. Hartford Financial said Thursday that it has preliminary approval to receive $3.4 billion of TARP money. The Journal reported that the government will also give money to Prudential, Principal Financial, and Lincoln National. The Treasury will also provide funds to Allstate which sells life insurance alongside other types of insurance, and wealth-management firm Ameriprise Financial which sells life insurance and annuities.

The firms receiving money will be eligible because they were already bank-holding companies or they have changed their status to become one by agreeing to buy a savings-and-loan institution. The Journal reported that in exchange for the aid, the government will get warrants as well as preferred shares that initially pay a 5% dividend. The paper said final approval for insurers to receive TARP money depends on completion of paperwork. Funds are usually received within a month of preliminary approval.

Consumer Sentiment Rises - U.S. consumer sentiment rose in early May on a rosier outlook according to a survey released Friday by the University of Michigan and Reuters. The consumer sentiment index rose to 67.9, the highest reading since September, from 65.1 in April. Economists polled by MarketWatch had expected a May result of 68. The index hit a 28-year low of 55.3 in November. Consumers' expectations jumped to 69 in May from 63.1 at the end of April. Their views on current conditions fell to 66.2 from 68.3.

Articles

Fiscal Suicide Ahead - By David Brooks - The New York Times - "Barack Obama came to office with a theory. He believed that the country was in desperate need of new investments in education, energy and many other areas. He also saw that the nation faced a long-term fiscal crisis caused by rising health care and entitlement costs. His theory was that he could spend now and save later. He could fund his agenda with debt now and then solve the long-term fiscal crisis by controlling health care and entitlement costs later on."

Health Costs Are the Real Deficit Threat - By Peter Orszag - The Wall Street Journal - "This week confirmed two important facts -- that health-care costs are the key to our fiscal future, and that even doctors and hospitals agree that substantial efficiency improvements are possible in how medicine is practiced."

Derivatives Trades Should All Be Transparent - By Viral V. Acharya and Robert Engle - The Wall Street Journal - "On Wednesday, Treasury Secretary Timothy Geithner proposed new regulations on derivatives trading. The administration's goal is to introduce greater transparency to these financial contracts in order to reduce the systemic risk they pose to financial markets and to the economy as a whole. The proposals are good as far as they go, but they don't go far enough."

New Rules for Derivatives - The New York Times - "President Obama’s new proposal to regulate derivatives would go a long way toward reining in the complex products and reckless practices that have been a big factor in the financial crisis. But it would not go far enough. In apparent deference to those who have made major profits from unfettered derivatives trading, the proposal stops shy of creating a fully transparent market."

Thursday, May 14, 2009

Treasurys Rise on Jobs, Fed Buyback - Treasury prices crept up Thursday, putting yields at their lowest in more than two weeks, on economic data for jobless claims and inflation. The Federal Reserve's purchase of debt maturing in 2010 and 2011 also helped keep prices up. Bonds gained support from a Labor Department which said initial claims for jobless benefits last week rose to the highest level since mid-April, in part due to layoffs after automaker Chrysler's bankruptcy filing (claims rose to 637,000 - up 32,000). On the inflation front, the producer price index (PPI) was higher for April but it was due to food costs primarily.

Natural Gas Inventories - U.S. natural gas inventories rose 95 billion cubic feet last week which sent prices down 4% to $4.15. This is still quite a bit higher than the recent low of around $3.50.

Chrysler to Close Dealerships - Chrysler will close almost 800 dealerships as part of its bankruptcy restructuring, according to media reports Thursday. President Obama is pushing for Chrysler to reorganize within 60 days but recent reports suggest the process could take up to two years.

Mortgage Rates Rise - Barely - Freddie Mac said Thursday that the 30-year fixed rate mortgage average rose to 4.86% with an average 0.6 point for the week ending May 14, from 4.84% last week. Last year at this time, the average was 6.01%. "Interest rates for fixed-rate mortgages were little changed this week following the release of April's employment figures," said Frank Nothaft, Freddie Mac chief economist, in a statement.

AIG to Divest Taiwan Life Insurance Unit - AIG is planning to divest Nan Shan Life Insurance Co., its Taiwan life-insurance unit, according to an on-line report Thursday in The Wall Street Journal which cited people familiar with the matter. The newspaper said that AIG will offer the business to prospective buyers in an auction as well as plan for an initial public offering of the unit.

Wal-Mart's Profit Slightly Higher - Wal-Mart reported its first-quarter profit from continuing operations rose slightly to $3.03 billion, or 77 cents a share, from $3.029 billion, or 76 cents, in the year-earlier period. Revenue including membership income in the quarter ended April 30 fell to $94.2 billion from $94.9 billion, hurt by a stronger dollar. The company forecast second-quarter profit of 83 cents to 88 cents a share with Wal-Mart U.S. and Sam's Club each expecting their comparable store sales to be between flat and up 3%.

Wednesday, May 13, 2009

Obama - 'Stars Are Aligned' - President Barack Obama on Wednesday called for comprehensive health-care reform this year, saying "the stars are aligned" for change. Following a meeting with House Speaker Nancy Pelosi and other lawmakers, Obama said any bill he signs must bring down costs, let consumers choose their doctors and plans, and deliver quality care. Pelosi said she is "quite certain" a reform bill will be on the House floor by the end of July.

Democrats Compromise on Climate Change Bill - Democratic leaders in the House of Representative have said they reached key compromises on proposed climate change legislation, according to reports. The new version would scale back the original target of a 20% reduction in carbon dioxide emission by 2020, and would also include less strict provisions on renewable power for utilities. House Energy and Commerce Committee Chairman Henry Waxman (D-CA) and Rep. Ed Markey (D-MA) announced a deal late Tuesday.

American Express to Issue Notes - American Express on Wednesday filed a prospectus with the SEC for a note offering with proceeds intended to help pay back funds from the TARP. In the recent stress tests, the company was told it did not need to raise capital.

Next TARP Recipients - Small Banks - Banks with assets of less than $500 million will be able to apply for capital injections from the TARP, Treasury Secretary Timothy Geithner told a gathering of community bankers on Wednesday. Treasury has roughly $109.6 billion in funds left in its bank bailout package. However, Geithner said he expects to use funds repaid from large investment banks, in part, to pay for the new capital injections for smaller public and private community banks. Goldman Sachs and some other large financial institutions have announced they will seek to repay Treasury from funds they received as part of the TARP. Geithner also said he plans to raise from 3% of risk-weighted assets to 5%, the amount for which qualified institutions can apply. Many community banks have already received funds from the program, but many more are still waiting to receive allocations.

Articles

'A Blatant Extortion' - The Wall Street Journal - "Court cases get dismissed all the time, but rarely are dismissals as significant as the two lawsuits against Dole Food and other companies that were tossed recently by a California judge. Among other good things, the ruling is a setback for tort lawyers who troll abroad seeking dubious claims to bring in U.S. courts."

Return of the Trustbusters - The New York Times - "During the entire Bush administration, the Justice Department’s antitrust division didn’t bring a single case against a big company for anticompetitive behavior to shut out a smaller rival."

GM Retirees Bully Bondholders With Obama’s Help - By David Reilly - Bloomberg - "The current deal 'can be seen as one that serves up bondholders on the altar of political self-interest.' 'The powers that be will not face any major constituency risks by screwing some mutual funds, insurance companies, pension managers, and hedge funds (who often manage pension and endowment money etc.) out of their fair and equitable treatment.'"

Tuesday, May 12, 2009

EU Plans Bank Stress Tests - The European Union is planning a stress test of its banking system to find out if the sector has enough capital, according to a Reuters report citing EU sources Tuesday. The plan isn't for a stress test of individual banks as the U.S. has done, but instead is for an "aggregated stress test" which should show the resilience of the overall sector, the report said.

Bank of Korea Leaves Rates Unchanged - The Bank of Korea left its benchmark policy interest rate unchanged at an all-time low of 2.0% Tuesday. Economists had predicted no change with signs of improvement in South Korea's economy s the reason. Most economists predict the rate will be unchanged through the end of the year at least.

Bernanke Encouraged By Capital Raising - Federal Reserve Chairman Ben Bernanke said Monday evening he is encouraged by the quick response by banks to raise private capital as required by the government after 19 major banks were put through the most thorough and rigorous examination of potential losses in the banking sector ever attempted. Bernanke said the main goal of the stress tests was to increase confidence in the banking system by reducing uncertainty about potential losses if the economy were to suffer an even greater downturn than currently expected. Although the success or failure of the stress tests won't be known for some time, "initial indications are encouraging," Bernanke said.

GM Execs Sold Shares - Six of GM's top executives, including Vice Chairmen Thomas Stephens and Robert Lutz, sold about 200,000 common shares in the company recently, according to regulatory filings submitted Monday. The transactions took place between Friday and Monday and the shares were unwound at a price range of $1.45 to $1.61 a share. The beleaguered auto maker has been surviving on $15.4 billion in federal aid and is trying to offload $27 billion in debt by convincing thousands of creditors to exchange their bonds for 10% in GM stock.

Ford to Offer 300 Million Common Shares - Ford said late Monday it will offer 300 million common shares at a par value of 1 cent a share. The proceeds from the offering are expected to be used for general corporate purposes, including to fund with cash, instead of stock, a portion of the payments Ford is required to make to the Voluntary Employee Beneficiary Association retiree health care trust with the United Auto Workers. "We continue to make strong progress on our transformation plan - gaining retail market share with great new products, improving quality, reducing costs and positioning Ford for a return to profitability," said CEO Alan Mulally.

Monday, May 11, 2009

GM Needs Europe Funding Now - General Motors CEO Fritz Henderson said in a restructuring update Monday that the automaker has an "urgent" need for funding in its European business while it plans to start notifying North America dealers of closures later this week. Henderson said that bankruptcy is still "probable" as GM approaches the June 1 deadline to prove its viability to the U.S. government. As GM works to shed several brands, Henderson said the company is negotiating with two parties about Hummer on a deal that could be reached by the end of the month while a "number of parties" have come forward with interest in Saab.

Change in Antitrust Policy - The Justice Department withdrew Monday a report on monopoly policy issued last September, signaling a more aggressive antitrust policy under President Obama. "Withdrawing the Section 2 report is a shift in philosophy and the clearest way to let everyone know that the Antitrust Division will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers," said Assistant Attorney General Christine Varney. "The recent developments in the marketplace should make it clear that we can no longer rely upon the marketplace alone to ensure that competition and consumers will be protected," Varney said.

BB&T Announces Plan to Repay Government Investment - BB&T today announced a plan to repay all of its preferred stock and warrants invested in the company through the U.S. Treasury’s TARP Capital Purchase Plan. “I am pleased to announce that BB&T is poised to be one of the first large financial institutions to repay the government investment,” said President and CEO Kelly S. King. As part of the plan, BB&T declared the third quarter 2009 dividend of $.15 per share, a 68% reduction compared to the third quarter last year. The move will preserve approximately $725 million in capital on an annualized basis. Additionally, BB&T announced that it has commenced a public offering of $1.5 billion of its common stock for sale to the public. In its news releases, BB&T has said it intends to use the proceeds of this offering, in addition to savings from the dividends, to repay the preferred stock and associated warrants BB&T issued under the TARP program.

Articles

How Ford Restructured Without Federal Help - By Paul Ingrassia - The Wall Street Journal - "You're forgiven if you think the Chrysler Bailout is a hot new car that competes with another model called the GM Rescue. Then there is the Ford Forgo, brought to us by the only Detroit auto maker to forgo government assistance, at least so far."

Sunday, May 10, 2009

Before we get to the points of view section, in honor of this special day, we did a bit of research and found a couple of good sites that gave tons of good information. Did you know that ancient Egyptians, Romans, and Greeks also had days devoted to mothers? Okay, they were Goddesses, but you get the point...

The Complete History of Mother's Day - Mother's Day Central - "One of the earliest historical records of a society celebrating a Mother deity can be found among the ancient Egyptians, who held an annual festival to honor the goddess Isis, who was commonly regarded as the Mother of the pharaohs."

Mother's Day - Wikipedia - "In most countries, Mother's Day is a recent observance derived from the holiday as it has evolved in North America and Europe. Many African countries adopted the idea of one Mother's Day from the British tradition, although there are many festivals and events celebrating mothers within the many diverse cultures on the African continent that long pre-date colonization. In Nepal and other hindu tradition, its called 'Mata Tirtha Aunshi' or 'Mother Pilgrimage fortnight.'"Points of View

The Credit Card Squeeze - The New York Times - "At a time when everyone is talking about troubled banks, Congress can provide relief to millions of their increasingly alarmed customers. Many credit card holders are complaining about unexpected increases in fees or interest rates that double or triple for no reason."

Demoting California - The Wall Street Journal - "One of the biggest stories in politics earlier this year was about California's budget teetering on the edge of a $42-billion deficit abyss. It only staved off insolvency when its legislature ended three months of gridlock to pass a budget with steep tax hikes and spending cuts. Guess what the Obama Administration is doing? It is telling Governor Arnold Schwarzenegger that it will revoke nearly $7 billion in federal stimulus money unless the state restores legislated wage cuts for unionized health-care workers."

The Half-Penny Solution - The Wall Street Journal - "They scrubbed 'line by line' through this historically huge budget and identified $16.7 billion of budget savings. This is less than a penny, about 0.47 cents, of savings out of every dollar Uncle Sam will spend this year. And these aren't real savings that will reduce debt, because Congress has already fixed the budget totals. Thus, each dollar saved from the African Development Foundation gets reallocated to some other foreign aid program."

Saturday, May 9, 2009

Long time, no see. I haven’t posted to our blog in several months since my time has been consumed by my CPA firm’s heavy work schedule during tax season. But now it’s time for me to get back in the swing of things, and here I am to give you all the gory details on the financial markets and the economy over the last few months.

Since I last blogged about three months ago, things have been fairly eventful in the economic world. At least I finally have some good news to report rather than the bleak avalanche of negative publicity we were barraged with over the last 12 months.

In my February 19, 2009 post, I told you about the tree in my backyard that I use as a predictor of spring. At that time I mentioned my belief that as the winter turned to spring, the stock market would start performing better, and we would see consumer confidence start improving. While the parallels that I drew may have been somewhat silly, I honestly felt that the economy was not nearly as bad in February as the press was reporting, and it was just a matter of time before the financial markets would improve.

Here we are today, less than three months later, and the tree that I referenced in my February 19th post is now in full bloom, and almost all of my roses awake from the winter. Here are a few pictures of my garden for your reference (and before you ask, yes, I tend to the roses):

As I predicted back in February, the financial markets have improved greatly over the past three months – since February 19th, the Dow Industrial Average is up 12.5% and the S&P 500 is up 15.5%. The market continued going down even after my February post, but it appears to have finally bottomed as of March 9, 2009. Since that bottom was established, the Dow is up 28.3% and the S&P is up a stunning 33%. The S&P 500 is now slightly positive for 2009. It’s hard to imagine that these indices moved up so quickly in the face of such horrible financial news. Also, don’t forget that on Election Day in November of 2008, the Dow was at 9,625; today it’s at 8,436 – that’s 12.5% lower.

Many of my clients continue to express their opinion that the markets will not improve because the economy is so bad. I would like, however, to take the opportunity to go through the reasons why the financial markets do not need the economy to improve before they go up. The financial markets only need for the economy to quit going down before they improve, and it appears that as of today, the gradual deterioration of the economy has slowed, if not turned towards the better.

The first quarter financial earnings results for the S&P 500 have been quite interesting. While they are significantly down from this time last year, they are still significantly better than anyone projected. I absolutely do not believe the poor quality of the reporting regarding the earnings and financial data provided by the national media. It seems that these “learned” reporters cannot believe that the banks made any money during the first quarter of 2009 much less billions of profits.

The bigger question to me regarding bank earnings is how banks could possibly not make money. Have you checked out what money market accounts are paying now? Even harder to believe is that CD rates are paying below many money market account rates. Therefore, the cost of money to the banks is practically zero. If they can loan money at 4%, 5%, or 6% when their money cost is practically zero, then even a less savvy investor can make money with that interest rate spread.

The national media just cannot seem to wrap their brains around the fact that the environment for loaning money has rarely been better. There are basically two ways to subsidize the banking industry: one is that you actually subsidize them, which we have already done. But the most efficient way is to simply allow them to make more money by making their cost of money at nearly zero. That is what we are seeing now.

I suggest you re-read my February 19th post wherein I set out two criteria for the financial markets to improve and for consumer confidence to get better. One was the elimination of the mark-to-market rules. I am glad to report that in early April, mark-to-market was dramatically revised, and it now implements common sense rather than just mathematical calculations. Maybe they read our blog… While the uptick rule has yet to be completely restored, there is no question that it’s coming.

Almost all of the major pension plans have removed their shares from brokers if those brokers were allowing the shorting of stocks. The combination of the SEC’s enforcement of the laws that have been on the books since the 1930’s along with the availability of fewer shares to short have dramatically leveled the playing field for those of us who are long in the market. The combination of these two items has drastically improved stock market performance in the intervening three months.

As I indicated in prior posts going back six months ago, I didn’t feel there was any question that the economy was going to improve. The reality of the situation was that the economy was never as bad in October and November of 2008 as the media was trying to make you believe; and it’s not as good today as they would like for you to believe, either.

The fact of the matter is that in many respects, the recession was manufactured by media hyperbole. Had it not been for the hysteria caused by the media in the fall of 2008, this recession would have been much milder than it eventually became. The enormous scare tactics from the media and our own government caused consumers to shut down their spending habits. The end result was a complete bankruptcy of the automobile industry in America. While the fallout started there, it certainly didn’t end there.

For those who are interested, my prediction is that there will be no American auto manufacturers in the United States – that will soon be a thing of the past. This is not so much because of design or production failures, but because of the failure to control the unions, which have essentially destroyed car building as we know it in this country. Don’t get me wrong; there will be millions of cars produced in America in the coming decades. Unfortunately, they will not be produced by American companies.

When I’d expressed my confidence in the past that the Federal Reserve and its very able chairman, Dr. Ben Bernanke, would restore level footing to the economy, I was greeted with incredible skepticism by my readers. I knew from economic history that the steps taken by the Federal Reserve would work, but many of my clients remained unconvinced. In fact, it wasn’t uncommon for me to be told that while that might’ve been true in the past, “things were different this time.”

While I suppose everyone would like to believe that the world is different now, when it comes to economics there haven’t been any significant new developments. Money trends and flows tend to have the same effect as they have always had on the economy. If you flood the system with money, eventually that money will end up in the pockets of the people and then it will eventually be spent. The beauty of flooding the system with money is that it creates commerce; the negative is that the flooding eventually creates inflation. Given the two, we would rather have growth than inflation, and that’s the risk Bernanke took in the fall of 2008.

It is often believed that it takes at least a year for the Federal Reserve’s moves to positively impact the economy. Here we are today – only eight months into this process – and there are already clear signs that the economy has stabilized. The economy isn’t nearly as good as it should be, but at least it has quit falling.

Before anyone jumps to any conclusions regarding where this improvement has fallen short, it’s important to understand the facts. The tax stimulus changes only went into effect on April 1, 2009, so we’re only five weeks into this relatively small tax decrease for 150 million Americans. While the tax decrease will benefit the average taxpayer as we go forward, it has had very little effect so far.

The remainder of the $800 billion in the stimulus package has yet to be spent. I read almost daily of roadblocks set up by Congress and by various state governments to actually spend the money. The money is coming and it will help, but it just hasn’t started yet. Expect to see this money in the economy by the summer.

Does that make you wonder why the economy has already started to turn around even before the stimulus bill has been spent? You might recall from prior posts that I suggested the stimulus act was necessary, but that it was for way too much and for way too long. The current environment of an improving economy, even before the vast majority of the stimulus bill was spent, has clearly proven that effect.

Don’t you find it somewhat ironic that President Obama signed an executive order basically requiring union labor on all stimulus funded projects? Aren’t these the same unions that systematically destroyed the automobile industry in America? Isn’t it also interesting that only 11% of workers are now covered under union contracts? That means that 100% of taxpayers (only 50% actually pay income taxes) will fund jobs for workers only covered by 11% of the workforce. I guess all of those political statements regarding an administration with no biases and no preconceived allegiance to campaign money got lost somewhere in the application of the stimulus act.

The stock market is a forecasting vehicle. It looks into the future and evaluates stocks not as of today, but forecasts where it will be six months or a year from now. The stock market forecasted the downward turn in the economy before it actually happened and the stock market today is forecasting an improvement in the economy even though it’s not here. Yes, we see optimism all around us, and hopefully the bottom has been hit. However, as of today, there is too much unemployment, little (if any) activity in the housing market, and there is still a reluctant consumer who is unwilling to part with their hard-earned money.

The beauty of the American political environment is that the majority rules – whatever the majority decides is the rule of the land, be it good or bad. Since the majority elected that current administration, all of us – regardless of our beliefs – must support the actions taken by our government. It is clearly the majority that is driving the train at the current time, and all of us will have to deal with its repercussions.

Unfortunately, the current administration is not following the history books. Higher taxes have never led to helping the deficit situation. Nationalizing health care will soon be known as Medicare II. None of these enormous acts to make government bigger will work, but I guess the current administration hasn’t learned anything from the past. However, the U.S. is a broad and diverse economy; we will survive these acts and the economy will grow bigger and stronger as a result of the knowledge we get from even these misplaced efforts. I am very optimistic.

Many of the advocates of higher taxes point to the Clinton years to prove that you can have higher taxes and a good economy. No one can argue that the economy wasn’t good during the Clinton years. As you recall, with the help of the Federal Reserve, the country came out of a recession in 1993 and was basically strong through 1999. It is also true that Bill Clinton, in the last few years of his final term, increased taxes and actually balanced the budget. However, it’s often forgotten that this one act alone threw the country into a relatively severe recession during 2000 and 2001. Those of us who lost in the stock market during that time do not readily forget it.

I have often wondered why a country that has grown and prospered so much under capitalism for the last 233 years would suddenly want to scrap its heritage and move to a socialistic system. But that discussion is for another day… In any case, the majority rules, and we will need to see how it all turns out.

There is no question that the financial markets are seeing inflation on the horizon. The benchmark 10-year Treasury bill has moved from a rate of 2% to well over 3% in just the last few months alone. The financial markets would not be bidding-up interest rates if it did not see significant inflation coming and the economy improving. All of this is incredibly ironic given that home mortgages are now maintained at artificially low interest rates by the Federal Reserve. If you have not looked into refinancing your home by now, your opportunity is quickly evaporating. It would not surprise me in the least to see home mortgages start to rise dramatically in the coming months once the Federal Reserve quits subsidizing long-term interest rates.

The Obama Administration just proposed stricter tax policies on overseas earnings of U.S. corporations. Once again, this is a misplaced act that is being proposed in a time when it is needed least. The fact of the matter is that the U.S. would be much better off if corporations paid no income taxes. I realize that sounds like a radical approach, but economic history has proven this to be crystal clear. Corporations do not pay taxes; individuals pay taxes. If anyone believes that tax rates paid by corporations are not passed along to consumers, then they really do not understand cost accounting.

It would be best for all Americans if corporations were completely exempt of United States income taxes. You often hear about corporations relocating to countries without taxation. If we had no taxation in this country, there would be no reason for our great corporate entities to relocate to tax havens. Many corporations from around the world would come to the United States to enjoy the tax benefits. With them, they would bring their capital, their employees and their prestige.

There have been many studies on the subject that prove the economics that no corporate taxes would be much more beneficial than higher taxes by corporations. While it does not seem intuitive, the economic benefits of bringing new and better corporations along with their capital, personnel, resources and prestige is far greater than the minor economic impact of tax rates on these corporations. Once again, the current administration has failed to read the economic textbooks, and once again, it is not different this time.

The reality of the situation regarding foreign corporations is that most of the employees that U.S. companies employ overseas are not performing highly skilled jobs. Yet the profits from these overseas companies allow the U.S. to maintain managerial and skilled positions here in the United States. The claim that punishing corporations abroad will create more jobs at home is completely false. It’s more likely that they will drive away domestic and foreign investors, leading to few jobs, not more.

Washington needs to quit trying to punish corporations; at some point, companies and entrepreneurs will simply go elsewhere, taking their investment capital – and the jobs that go – with them. The United States currently has the highest corporate tax rate in the developed world. Our rate is almost 50% higher than the composite of all other developed countries. To make that matter worse by increasing overseas taxes is another misplaced effort by Washington.

The economy will get better for the remainder of 2009. It will be a gradual but slow improvement. 2010 will be even better than in 2009. As the trend continues, 2011 will be better than either of the two previous years. As workers resume full-time employment in 2010, each of them will continue to contribute a small part to an economy that, by then, will be growing at a very healthy pace.

Yes, there are problems coming down in the economy. At some point there will be inflation. We must rely upon the skill of the Federal Reserve to take away some of the punch from the party when the economy improves. We have a very able head of the Federal Reserve. Hopefully he will react as well then as he has recently.

The government was slow to attack this recession, but they moved aggressively when they finally saw the light. They did not change the mark-to-market rules until April, when many of our great bank institutions had already been destroyed. Literally trillions of dollars of wealth have been destroyed by the failure to install the uptick rule. All of these moves came late, but at least they came.

Contrary to what you read in the newspaper and what you hear on TV, no major United States banks will be nationalized. Yes, they went through a hard time, but if it had not been for mark-to-market accounting issues that destroyed many banks, it would have been just another recession that the banks would have had to survive. As the economy continues to improve, and as the banks make more money, there will be a substitution in the capital positions by extraordinarily high earnings. Contrary to what you hear from the media, there is no need now, nor was there a need then, to ever nationalize a major U.S. bank.

If you wonder how I can express such certainty that the economy is going to improve, basically the axioms of economics dictate this result. There is an extraordinarily large freight train of money that is getting ready to be dumped into the economy. Not only are we going to have the stimulus act money, but also the literally trillions of dollars in government supported bonds and debt instruments. As the banks stabilize, lending will improve and the car companies will once again issue debt on new automobiles. This overwhelming avalanche of money will make its way through the economy and ultimately into consumer’s hands. As consumers start to feel confident, they will once again spend and the battleship of economic stability will turn.

I envision the stock market taking a summer swoon and then having a very good fall season. Many of the well-known mutual funds are now up for 2009. All of the skeptics that failed to make their 2008 or 2009 IRA contribution because they thought the economy was so bad were wrong. The stock market doesn’t react to the economy; rather, the stock market predicts the economy. Right now, the stock market is clearly predicting a better economy.

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Rollins Financial, Inc. is an SEC registered investment advisory firm that was established in Atlanta, Georgia in 1990 by Joseph ("Joe") R. Rollins. Joe along with partners Robert ("Robby") E. Schultz, III and Edward ("Eddie") J. Wilcox offer independent investment management services for individuals, small businesses and
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